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Indonesia's Wahid Lashes Out at Ministers
After IMF Postpones an Internal Review

By

Jeremy Wagstaff Staff Reporter of The Wall Street Journal

Updated April 3, 2000 12:01 a.m. ET

JAKARTA, Indonesia -- Indonesia's President Abdurrahman Wahid has displayed acute skill in sidelining political opponents in the first five months of his rule. But the economy may yet be his undoing.

The International Monetary Fund last week delayed an internal review of Indonesia's progress, complaining that Indonesia had failed to meet a third of the deadlines agreed under a January letter of intent. The postponement jeopardizes the release of $400 million of loans for Indonesia -- and could affect a meeting with official donors where Indonesia hopes to reschedule $2.1 billion of debt. The stalled payment follows growing public IMF frustration with Mr. Wahid's government and effectively ends a honeymoon he has enjoyed with Indonesia's donors since his election to the presidency in late October.

Tempers Flare

News that the IMF is withholding funds spurred Mr. Wahid into an angry outburst against his economic ministers. Among other things, he has banned them from making any more overseas trips even though Mr. Wahid himself has spent a lot of his time abroad since he took office. Saturday, he summoned ministers to a cabinet meeting to review the country's progress. "It's been a wake-up call," said Emil Salim, a former minister and head of Mr. Wahid's main team of economic advisers. Indonesian ministers have agreed to speed up the reforms ahead of a review by the IMF set for early this month.

But Indonesia's economic problems may prove harder to resolve than political ones. Politically, Mr. Wahid, a near-blind cleric, has won grudging praise: In the first few months of his rule he has wooed broad international support while emasculating the once-powerful military and adroitly under mining other political opponents. This despite serious unrest in several parts of the country, including a separatist movement in Aceh and continued ethnic and religious conflict in northeastern Indonesia.

Mr. Wahid's economic record, however, remains weak. Recovery has been slow, largely because the core problems of the crisis haven't been fixed: the banking system still isn't working; most corporate debt is yet to be restructured; and the courts are still unpredictable. What's more, investment that might fund a recovery remains elusive: overall investment, according to the World Bank, shrank by 21% in 1999.

Meanwhile, with inflation receding and interest rates declining, consumer demand has picked up in recent months: in February, for example, 21,332 cars were sold, nearly double the number sold a month earlier. Official figures show the economy expanded by 0.9% in the fourth quarter of 1999 compared with the previous quarter, or 5.8% when compared with the same period a year earlier.

Economists, though, argue that the rosy statistics are misleading. According to Song Seng Wun, Singapore-based regional economist for GK Goh, much of the expansion in gross domestic product this year and last year is a "statistical trick" caused by a discrepancy between the government's food-heavy inflation index and the more industry-oriented deflator. Running such a deflator through the GDP figures would even out a dramatic drop in food prices, leaving little or no growth, in real terms, over that period, he says. "On the surface it looks encouraging, but underneath the hood it looks a bit wonky," he adds.

Indeed, whatever growth is there is weak. Kustarjono Prodjolalito, director of the Indonesian Retailers' Association, said after a trip across the main island of Java that his members were reporting only marginal increases over last year. "Most of my members aren't showing a loss, which is an improvement," he says. "But we don't expect strong sales this year." He blames continued uncertainty.

If Indonesians remain cautious about the future, foreign investors are even more so. Foreign bankers say they are wary of investing again because of the confusing picture Indonesia still presents to the outside world. "We've tried three times in the past six months to re-enter the country with credit facilities and each time something has happened to make us pull back," says an American banker who shifted his Jakarta office to Singapore late last year.

The events of the past week only deepen this confusion. On one hand, the government was able to conclude the sale of auto maker PT
Astra International
to a Singapore consortium led by auto distributor
Cycle & Carriage Ltd.
for more than $500 million. It was the first major sale of assets since the crisis began, after months of tussling among Astra's management, potential suitors, and the government's debt restructuring body, the Indonesian Bank Restructuring Agency.

But despite the size of that transaction, about half the country's corporate assets remain unsold on IBRA's books. Indeed, the slow progress made since Mr. Wahid took power has raised questions about the government's competence.

Open Disputes

Public disagreements among ministers and between ministers and the president have done little to convince the world that the present cabinet -- cobbled together from factions competing for last October's presidential election -- is united and effective. Moreover, some factions have pushed hard for their supporters to take senior government positions to pave the way for the next general election in 2004. "It's a nonfunctioning cabinet," says Mochtar Buchori, a senior figure in the Indonesian Democratic Party of Struggle, whose leader Megawati Sukarnoputri is Indonesia's vice president.

At the heart of Mr. Wahid's problems lie questions about his credibility. For instance, just last week his government was forced to make a U-turn when, fearing social unrest, he postponed an IMF-mandated reduction in domestic government subsidies on certain types of fuel.

What's more, despite his success in rolling back the armed forces, many Indonesians suspect he isn't entirely serious about investigating past excesses. Mr. Wahid's attorney-general, Marzuki Darusman, has so far been unable to get former President Suharto in for questioning on allegations of ill-gotten wealth: Mr. Suharto again defied a summons on Thursday, citing medical reasons. "Getting Suharto investigated is a source of legitimacy" for Mr. Wahid, says Kusnanto Anggoro, a lecturer in political science at the University of Indonesia. Indeed, "it's becoming more important if he can't deliver on the economy."

Reversing Decay

Others argue that Mr. Wahid can't change things overnight. Mr. Suharto ruled Indonesia for more than 30 years, and his successor, B.J. Habibie, made only cosmetic reforms that did little to stop the rot. Whatever change he manages is likely to be piecemeal, his advisers argue. "There are plenty of problems that he needs help with," says Mr. Salim, the economic adviser.

Indeed, Mr. Wahid's government won points when it detained Mohamad "Bob" Hasan, a businessman who was a key member of Mr. Suharto's inner circle, last Tuesday on allegations of financial wrongdoing related to an aerial forestry-mapping project. At the time of his arrest, he was expected to be detained for at least 20 days.

While several Suharto children and friends have been questioned, it was the first time anyone close to Mr. Suharto had actually been arrested.

Aligned against that situation have been a string of court rulings that have embarrassed the government and raised doubts about its success in cleaning up the judicial system. The most recent: a ruling on Thursday by the State Administrative Court that IBRA's takeover of
Bank Bali
was illegal. Bank Bali was taken over last year after the bank failed to strike a deal with United Kingdom-based
Standard Chartered Bank
PLC on a recapitalization plan. The British bank had been negotiating to buy a 20% stake in Bank Bali. The ruling is a setback for IBRA's restructuring efforts and raises doubts about the future of other banks taken by IBRA.